S E R V I N G C A N A D I A N S A U S E R V I C E D E S C A N A D I E N S CBA/Justice Annual Meeting National Environmental Energy and Resources Law Section Law Section Ottawa, ON October 22, 2004 Joanne Kellerman Senior Counsel Legal Services, Natural Resources Canada Climate Change: Proposed Policy Framework for Large Final Emitters (LFEs)

S E R V I N G C A N A D I A N S A U S E R V I C E D E S C A N A D I E N S LARGE FINAL EMITTERS Large Final Emitters (LFEs) include: oil and gas production upgrading and refining pipelines thermal power generation Mining In 2000, LFEs were responsible for 46 percent of Canada’s total GHG emissions. In 2010, their share of Canada’s total GHG emissions is project to increase to approximately 50 percent. 1 steel aluminum chemicals and fertilizers pulp & paper cement and lime

S E R V I N G C A N A D I A N S A U S E R V I C E D E S C A N A D I E N S Climate Change Plan for Canada The Climate Change Plan for Canada established a three-pronged approach to Large Final Emitters (LFEs): targets for emission reductions of 55 Mt from 2010 “business as usual” access to emissions trading, domestic offsets, and international permits to provide flexibility; and complementary measures, including cost-shared investments in innovative technologies, to reduce emissions. 2

S E R V I N G C A N A D I A N S A U S E R V I C E D E S C A N A D I E N S Policy Principles 1.Covenants with a regulatory or financial backstop 2.Targets will be based on emission intensity – the ratio of emissions to physical output. 3.The system will not disadvantage firms that have taken early action 4.Competitiveness of Canadian industry will be protected. 5.No one region will bear an unreasonable burden. 6.Pre-approved commitments of larger reductions over the longer term in lieu of near term reductions will be explored. 7.The target will not be more than 55 Mt. 3

S E R V I N G C A N A D I A N S A U S E R V I C E D E S C A N A D I E N S Additional Policy Commitments In a letter to the Canadian Association of Petroleum Producers in December, 2002, the former Minister of Natural Resources stated: that during the first compliance period, the Government will ensure that Canadian companies would have the opportunity to meet their obligations at a price no greater than $15 per tonne; and to set emissions intensity targets at a level no more than 15 percent below projected 2010 levels. In a subsequent letter to CAPP in July, 2003, the former Prime Minister reiterated the above commitments and further accepted: qualifying research and development incentives will be built into compliance mechanism; and long-term emissions targets to be locked-in in advance for new projects. 4

S E R V I N G C A N A D I A N S A U S E R V I C E D E S C A N A D I E N S Progress to Date Extensive, ongoing meetings with provinces and territories, as well as stakeholders. Discussion papers shared on a number of key design elements. Agreement with industry reps (IETA/CWGCM) on principles for a Canadian carbon market. Memoranda of Understanding with Dupont Canada and with the pulp and paper sector in expectation of legislative authority to establish covenants. 5

S E R V I N G C A N A D I A N S A U S E R V I C E D E S C A N A D I E N S LFE Obligations LFEs will be prohibited from emitting GHGs without an equivalent number of permits. LFEs will be required to quantify and report their GHG emissions on an annual basis. Government will provide a number of permits through a distribution method defined by regulation. At the end of each year, LFEs will be required to remit a permit for each tonne of CO 2 equivalent that they released. Companies that do not have enough permits at this point will have to buy additional ones on the market. 6

S E R V I N G C A N A D I A N S A U S E R V I C E D E S C A N A D I E N S Quantification and Reporting On March 12, 2004, the Government announced the start of mandatory reporting of GHGs by Canada’s major emitters. Initial reports of GHG emissions for 2004 will be due June 1, 2005 Many of those affected already report their GHG emissions though mandatory and voluntary initiative in several provinces Lays foundation for mandatory reporting for the LFE program in 2008 (and for the national GHG inventory). Offers a one window approach to emission reporting. Via a joint federal/provincial/territorial system This first phase focuses on: emission sources of at least 100 kilotonnes of CO 2 equivalent annually. 7

S E R V I N G C A N A D I A N S A U S E R V I C E D E S C A N A D I E N S Allocation The federal government will allocate permits free of charge during the first commitment period: equal, on average, to 85% of forecast 2010 emissions; which corresponds to the 15% emissions intensity target required to reach 55 Mt goal. The allocation of free permits is based on emission intensity targets, meaning that the exact number of permits a company receives will depend on its level of production. Permits will be electronic and will reside inside an emission trading registry managed by the government. Permits will be distributed at the end of the year, after companies report to government (ex post distribution): however, a partial distribution of permits earlier in the year is being considered to facilitate early emissions trading (partial ex ante allocation). 8

S E R V I N G C A N A D I A N S A U S E R V I C E D E S C A N A D I E N S Variation by Covenant Covenants might vary the number of permits allocated to a company free of charge: for example, the government could agree to reduce the magnitude of a company’s obligation by increasing its allocation of free permits. The government will only negotiate covenants with industry to address specific issues: competitiveness; early action; Strategic capital turnover. The authority to enter into a covenant on behalf of the Government of Canada will likely rest with the Governor in Council. 9

S E R V I N G C A N A D I A N S A U S E R V I C E D E S C A N A D I E N S Additional Flexibility Mechanisms $15 per tonne Price Assurance Mechanism: the government will share the financial risk faced by LFEs by ensuring that they are able to purchase permits at $15 per tonne. at the beginning of each year, companies may choose to contract with government to provide a certain number of $15 permits. the number of $15 permits available to a company will be limited to the gap between their free allocation and their target, and these will not be tradeable. Incentives for research and development: most appropriate mechanism still under development. 10

S E R V I N G C A N A D I A N S A U S E R V I C E D E S C A N A D I E N S Emission Trading Companies will be free to trade emission permits at any time. There will also be a period between allocation and “true-up” for companies to obtain the exact number of permits they are required to remit. It is expected that, over time, a mature market will develop to include different types of transactions like forward contracts, etc. It is also expected that the emissions trading exchange or platform will be developed and operated by the private sector. The government does not intend to regulate the market, but will simply track the transfer of permits between different accounts in the registry. The government will monitor international transactions to ensure that Canada respects its obligations under the Kyoto Protocol. 11

S E R V I N G C A N A D I A N S A U S E R V I C E D E S C A N A D I E N S Compliance LFEs are free to pursue whatever strategy they choose in order to meet their compliance obligations: implement efficiency and process gains in their own operations; buy Kyoto permits from companies in surplus or from international sources; and/or obtain domestic “offsets” – permits that represent a net reduction or removal of GHG in uncovered activities. LFEs that don’t remit required permits will be subject to penalties. Offences and penalties will apply equally to LFEs covered by covenants and those covered by the backstop regime. Companies in covered sectors with very low emissions may not be subject to legislative obligations. A de minimis threshold is being considered. 12

S E R V I N G C A N A D I A N S A U S E R V I C E D E S C A N A D I E N S Timeline Monitoring and Quantification Reporting Ex post Allocation True-Up Jan. 1, 2008Jan. 1, 2010Jan. 1, 2009 Year 1 of Compliance Period Year 2 of Compliance Period Monitoring and Quantification Reporting Ex post Allocation Emissions Trading 13

S E R V I N G C A N A D I A N S A U S E R V I C E D E S C A N A D I E N S Web resources: Large Final Emitters website: Discussion papers